The Fund bites back

A notable development: the IMF's new chief economist says what he thinks of Joseph Stiglitz

FOR the past several years, Joseph Stiglitz—renowned economic theorist, Nobel laureate, former chief economist at the World Bank—has been waging a campaign of vilification against the IMF. Bizarrely, this campaign began while Mr Stiglitz was in post at the Bank, the Fund's sister organisation, as the two institutions laboured to devise co-ordinated strategies for dealing with crises in emerging-market economies. Having left the Bank (at the suggestion of America's Treasury), Mr Stiglitz upped the tempo. Interviews and articles poured forth. His most recent thrust is a new book, “Globalisation and Its Discontents”, which describes his feelings about the Fund in unforgiving detail.

The Economist reviewed Mr Stiglitz's book in our issue of June 8th. This column will not review it again—though it is necessary, by way of declaring an interest, to give a flavour. We said that the book was not about globalisation, as it claimed to be; that its criticisms of the Fund were poorly argued; that it was muddled and badly written; that its tone was unbearably self-righteous; that the policies it proposed were in important instances unworkable; and that it made reckless accusations of personal misconduct that were completely unwarranted. Aside from that, we quite liked it.

Then, on June 28th, an unusual thing happened. Kenneth Rogoff, the Fund's new chief economist and a distinguished academic in his own right, spoke to a group of people at the World Bank who had come to hear him discuss the book with Mr Stiglitz—and he told them exactly what he thought of it. Up to now the Fund has been at pains to maintain civilised relations with Mr Stiglitz. It has expressed its disagreement with moderation and courtesy. Big mistake. Nobody paid attention. Mr Rogoff decided to eschew politeness and try candour. Thus, his comments, since posted on the Fund's website, have attained the status of an instant classic.

Let's look at Stiglitzian prescriptions for helping a distressed emerging-market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the —no, make that we on the planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace, but especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Such language will doubtless be called unbecoming. A censorious report in the Financial Times made Mr Rogoff out to be the troublemaker: Mr Stiglitz was “dumbfounded” at this personal attack, it said, and dismayed by the Fund's refusal to “engage in a substantive discussion”. This seems odd. Mr Stiglitz routinely accuses those who disagree with him of bad faith, professional incompetence, or outright corruption. And how could he fail to notice the Fund's countless efforts at “substantive discussion”?

This column applauds Mr Rogoff's forthrightness. His remarks may be angry, but they do not lack substance. The paragraph just quoted makes a telling point. So does every other paragraph. For instance, Mr Rogoff charges that Mr Stiglitz, by casting himself as a whistleblower (guaranteeing copious sympathetic coverage in the press), undermined the ability of the Fund and Bank alike to deal with the problems they were asked to confront. This view has support within the Bank as well as at the Fund. And Mr Rogoff is right to reject Mr Stiglitz's oft-repeated accusation that the Fund is a slave to “market fundamentalism”. The IMF's very existence affirms the idea that markets sometimes get things wrong, and that action by public agencies is necessary as a result. The “market fundamentalist” slur is merely a tactic to win applause from undergraduates.

The IMF sometimes makes mistakes, to be sure. It is in the nature of things: the Fund practises battlefield medicine. Mr Rogoff has been among its critics in the past—but, like most others, he has given the Fund credit for doing its best in difficult circumstances. And he always found that it “bent over backwards” to take his arguments on board.

Mr Rogoff is new to the Fund. Soon he may learn to hide what he means between the lines. We hope not. Just in case, enjoy the straight talk while it lasts. The letter ends:

On page 208, you slander former number two, Stan Fischer, implying that Citibank may have dangled a job offer in front of him in return for his co-operation in debt renegotiations. Joe, Stan Fischer is well known to be a person of unimpeachable integrity. Of all the false inferences and innuendoes in this book, this is the most outrageous. I'd suggest you should pull this book off the shelves until this slander iscorrected.

Joe, as an academic, you are a towering genius. Like your fellow Nobel prize winner, John Nash, you have a “beautiful mind”. As a policymaker, however, you were just a bit less impressive.